U.S. again cites state secrets in Qwest case

Attorneys for the U.S. Intelligence Community on Monday asked a federal judge to postpone testimony from a potential witness in the SEC’s civil fraud case against former Qwest officials, stating that it “reasonably could be expected to cause damage to the foreign relations, national defense and national security of the United States.”

U.S. District Judge Marcia Krieger denied the motion. The potential witness in question is Sharon Black, a telecommunications attorney. She is slated to be questioned today by defense and government attorneys to determine whether she will testify during trial, if the case goes that far.

“However, in an attempt to accommodate the legitimate national security concerns of the United States, counsel for the United States may appear at the hearing and interpose a timely objection should any question to or answer,” Krieger said in her order Monday.

The SEC accuses former Qwest CEO Joe Nacchio, former president Afshin Mohebbi, former chief financial officer Robert Woodruff and former accountants Frank Noyes and James Kozlowski of orchestrating a fraud that inflated the Denver company’s revenue by $3 billion from 1999 to 2002.

Black, a proposed defense witness, is expected to testify that when Qwest was selling network rights about a decade ago – or indefeasible rights of use (IRUs) – the company wasn’t pawning off its network because it has more than enough fiber to meet its needs for 50 to 60 years. Qwest had been accused of swapping IRUs with other carriers in a scheme to boost its bottomline. While some of its trade partners booked revenue from IRU sales over the length of the contract – sometimes as long as 25 years – Qwest would record the revenue as a one-time, lump sum. The company ultimately paid $250 million to settle SEC allegations that it duped investors, but didn’t admit or deny guilt.

The SEC is seeking the repayment of salaries, bonuses and stock sale profits from the officials charged in the pending case.

In 2007, Director of National Intelligence Michael McConnell invoked the
state-secrets privilege, arguing that disclosure of certain information by the defense could “cause damage to the foreign relations and the national defense of the United States.”

Attorneys for the intelligence community said in its motion Monday it believes that “if Ms. Black’s testimony is allowed to proceed at this point, the protective order may be implicated.”

In filings connected to his criminal insider trading case, Nacchio suggested that the NSA sought phone, Internet and other customer records from Qwest in early 2001. When he refused to hand over the information, the agency retaliated by not granting lucrative contracts to the Denver-based company, he claimed. Nacchio said the anticipation of those contracts was one reason he had an upbeat outlook on Qwest. The government alleged Nacchio dumped millions of dollars in Qwest shares in early 2001 because he knew the company was struggling financially.

That NSA defense, however, wasn’t used during the criminal trial. Nacchio was convicted on 19 counts of insider trading and began serving a six-year prison term in April.

Andy Vuong joined The Denver Post as a business reporter in 2000 after graduating from the University of Colorado at Boulder with a news-editorial degree. His primary beats are gambling, telecommunications and technology. Over the years, his coverage has included everything from aviation to federal courts.